Who`s Next? Wall Street Wonders

September 09, 1991|By Pat Widder, Chicago Tribune.

NEW YORK — That sound you hear on Wall Street in the wake of the Salomon Brothers scandal and last week`s suspension of two executives at Shearson Lehman Brothers is the thump of rocks being overturned as firms try to ensure they won`t find themselves in the spotlight.

``The question is: `Who`s next?` `` said Perrin H. Long, who followed the securities industry for decades in New York before moving this year to head the research department at First of Michigan Corp. in Detroit.

``The Salomon debacle has certainly raised questions`` at firms all over the Street, he said. ``They are looking at trading, underwriting, sales practices, everything across the board. Nobody wants to see their image impaired.

``The last thing you want is for a government agency to uncover something about your own operations before you know about it.``

Executives of firms are reluctant to talk for the record about the implications of this because they would rather not disturb the presumption that all are committed to integrity and honesty and putting the customers`

interests first. Who in his or her right mind would say otherwise?

And why would you need an investigation-internal or conducted by an outside law firm-to review compliance practices, operations, etc. when all along, of course, your employees have operated ethically, with the utmost integrity, and always putting the customers` interest first?

But ever so quietly, that is what firms are doing: reviewing, investigating, tightening procedures, restating ethics policies. They are trying to make sure there are no surprises that will make their firm the answer to the ``Who`s next?`` question.

Wall Street is, after all, a service business utterly dependent on the trust and confidence of its customers. Wall Street doesn`t make widgets. It sells security and dreams, not necessarily in that order.

``Once you lose credibility, you`re out of business,`` said one executive.

``The bedrock of success is integrity and the confidence of the marketplace,`` said Ira Lee Sorkin, a former enforcement official at the Securities and Exchange Commission who heads litigation for the New York law firm of Squadron, Ellenoff, Plesent & Lehrer.

Drexel Burnham Lambert discovered that the hard way. So did E.F. Hutton. Both were major Wall Street firms devastated by revelations of financial misdeeds.

At Salomon, 8,000 employees can only hope that the tarnished credibility of the nation`s premier government-bond trading firm will be restored gradually with new management, tightened controls and increased regulatory scrutiny.

Salomon stunned the Street and infuriated regulators by admitting in August that its top executives had known for months about improper bidding by the firm in U.S. Treasury market auctions, but never told anyone.

At Shearson, top management showed last week that they had taken to heart two lessons from the Salomon scandal: Act decisively. Act swiftly.

This episode began with a small, ultimately unconsummated, trade entered on the Pacific Stock Exchange after the Big Board closed one day in November. It was the day that Shearson`s Lehman Brothers investment banking arm was pricing a stock underwriting for the company whose shares were involved in the trade, ConAgra Inc. The coincidence raised caution flags. Had Shearson attempted to change the stock`s closing price for its own benefit? The New York Stock Exchange has begun an investigation and, according to exchange officials, Shearson is cooperating fully.

In August, when allegations were made that someone higher up at Shearson may have been involved in the trade, Shearson hired an outside law firm to look into it. Last week Shearson suspended Peter Da Puzzo, its co-head of equity trading, and another trading executive until the investigation is completed. Da Puzzo and the other executive, Manny Geronimos, have denied wrongdoing.

A clear point was made in the letter Shearson`s chairman and chief executive, Howard L. Clark Jr., sent to employees announcing the suspension.

``We will not tolerate any conduct that violates the letter or the spirit of the laws and regulations that govern the conduct of our business,`` he wrote.

The Shearson revelation was a glancing blow. But it followed a crashing punch to the solar plexus that the Salomon debacle delivered to an industry beaten bloody by the scandals of the last half-decade.

While acknowledging the damage done to Wall Street`s reputation, Sorkin, for one, believes the industry sometimes gets a bum rap.

``The firms have for many years tried to do the right thing,`` he said.

``Hundreds of times a day they uncover (and correct) errors and mistakes that the public never hears about. It`s a very regulated industry.``

But, he added: ``You`re dealing with tens of thousands of brokers in thousands of firms and mutual funds, and millions of investors. You`re going to have situations where there are going to be errors of judgment.``

And, said an executive at another firm, some people in the business are unethical, dishonest and greedy. ``They can kill you if they want to.`` But most observers agree the outright crooks are probably small in number.

More insidious and harder to detect and control are those for whom greed isn`t the main motivation. ``They are driven by the desire to beat the game. It`s to win,`` the executive said. ``That`s what Wall Street is all about, and that can lead to behavior that is illegal or unethical.``